Over the past decade, U.S. businesses increasingly have relied on contract workers as a way to keep a lid on health care and retirement benefit costs and to give them more flexibility to adjust payrolls as conditions change. Now, with the American economy flashing code red, companies from Wall Street to Silicon Valley are casting off temporary workers and freelancers left and right, typically without any severance pay.

While the ability to shed contingent workers helps protect corporate profits, economists say it's a net negative for the economy. That's because while companies may save on labor costs, they aren't likely to use those savings to boost investment with the economy so weak, preferring instead to rebuild their balance sheets.

Meanwhile, the people who lose their jobs will be forced to cut spending drastically, particularly because many of them earn below-average pay and thus have little savings to fall back on. The overall result is a decrease in demand, further depressing the economy. Says Dimitri B. Papadimitriou, president of the Levy Economics Institute of Bard College in Annandale-on-Hudson, N.Y.: "Clearly there is a macroeconomic impact. It begs the question of what our social safety net is all about."

‘Falling through the cracks’
Consider Lauren Bender, a 47-year-old Manhattan resident who for the past eight years has worked on and off developing investment tools for Charles Schwab. That work supplied about 90 percent of Bender's income, which she says kept her "very well compensated." But starting last summer, Schwab pulled the plug on the three projects she was planning to complete, and her income from the brokerage firm has dried up.

Bender is looking for other work so she can meet her monthly mortgage payments of about $3,400 for an apartment she bought two years ago. As a self-employed contractor, Bender is not eligible for unemployment. "It's scary," she says. "I'm at risk of falling right through the cracks." Schwab confirms that it has cut contract workers as part of a broader drive to lower operating expenses by 7 percent to 8 percent this year.

Estimates vary widely on just how big this shadow segment of the U.S. workforce is at this point. The Government Accountability Office, which uses a broad definition for contingent workers, thinks the figure is about 31 percent of the labor force, although other estimates come in far lower than that, depending on how the term is defined. What's indisputable is that amid the current brutal economic environment, many companies are pulling out the hatchet.

Back in January, heavy equipment maker Caterpillar said it had cut 8,000 contract and agency workers since late 2008. That figure represented 40 percent of a total staff reduction of 20,000. "It has been part of our long-term strategy to have a flexible workforce by design," says Caterpillar spokesman Jim Dugan. "It has better helped us manage our overall employment levels." In late April the company is expected to disclose additional layoffs involving contractors.

Unreliable figures
The same trend is under way in Japan and France, both home to stringent anti-layoff laws. French carmaker Renault, for instance, in December said it would let go of some 1,800 contractors at a design center outside Paris.

Here in the U.S., the cutbacks of temporary workers mean the labor market is in much worse shape than the headline 8.5 percent jobless figure for March would suggest. Throw in part-timers who would like to work more and unemployed workers who have given up their job search, and you come up with a jobless rate closer to 15.6 percent, according to one measure buried in the Bureau of Labor Statistics' monthly Employment Situation report.

"The numbers are astounding," says Beth Shulman, an analyst with the Russell Sage Foundation, a New York-based social science research group. "These workers, often at the lower end of the pay scale, are losing hours, income, and benefits. That only worsens the recession."

In some instances, those temporary workers lucky enough to keep their positions are suffering pay cuts. In January, software giant Microsoft announced layoffs of 5,000 staff members and some contractors who work for employment agencies on its projects. Then by early March many remaining contractors learned they would receive a 10 percent pay cut. Lou Gellos, a spokesman for Microsoft, says the cuts in agency rates are part of "healthy belt-tightening to weather the [economic] storm and come out on the other side."

Marcarthur Baralla, a Brooklyn videographer, hopes to survive, too. He had been making about $3,000 per month filming corporate conferences for New York-based Wall Street Webcasting. In mid-December the company told him it could no longer use his services. Baralla is now waiting tables. "I'm finding some video work, but clients don't want to pay as much — or not at all in some cases," says Baralla. Such is the plight of a contingent worker in this Great Recession.